“That’s just a special account to pay for medical expenses, right?”
When we hear the word “health,” our brains automatically shoot to medical expenses. But a health savings account is actually much more than that.
Yes, you can deposit pre-tax dollars into the account and use it as a “medical checking account.” But if that’s all you use it for, you’re missing the point. Because when used correctly, an HSA can be one of the most effective tools in your investment arsenal.
If you’re eligible for an HSA (i.e., you hold a high-deductible insurance plan), here’s how to take full advantage of it.
Choose Your HSA Wisely
First off, it’s essential to know that not all HSAs are created equal. The HSA your employer enrolls you in may not be your best option. Fortunately, you can have more than one. That means you can use your employer-linked HSA to receive any contribution-matching benefits, then transfer your balance to a separate HSA offering better terms.
Don’t Be Afraid To Invest
To take full advantage of an HSA, you must invest your funds. Instead of thinking of it as a checking account, think of it as an investment account. In other words, don’t just dump in cash and let it sit there—invest that cash in different funds! This is where most HSA holders go wrong, with only 5% of accounts holding investments other than cash in 2017. (1)
That said, everyone’s situation is different. If you think you’ll need to draw from the account for medical expenses, you’ll want to keep some of your funds liquid.
Pay Out Of Pocket
Seems counterintuitive, right? Common sense would tell us that if we have medical expenses, we should pay for them with our health savings account. Well, in this case, common sense is wrong—if you can afford it. That’s because the more you pay out of pocket, the more time your HSA funds grow tax-free. If you’re touching your HSA all the time, it’ll never grow.
Again, this all depends on your unique financial situation. If you need it, use it. If not, let it grow.
Max Out Your Contributions
This year, the IRS raised the contribution limit to $3,500 for individuals and $7,000 for families. (2) If you can swing it, try to hit these maximums every year. This is important for two reasons.
First, with a high-deductible insurance plan, chances are you or your family will need to use it someday. Maybe not this week, or month, or year, but someday.
Second, if you’re fortunate enough to not ever need it, you’ll have successfully taken advantage of the ultimate tax shelter—depositing pre-tax dollars, growing them tax-free, and withdrawing them tax-free in retirement (for non-health-related expenses).
There’s obviously more that goes into maximizing your HSA, but you can start to see the power these accounts hold. To fully unlock their potential, you need to choose the right HSA, invest in appropriate funds, and adjust it as your goals and lifestyle change (or when faced with a medical emergency). That’s a tall order for those not specialized in financial planning.
Fortunately, we at Mason & Associates are here to help. If you’d like us to design a personalized road map to help you reach your financial goals, give us a call at (323) 254-3072, or simply click here to book your free 30-minute introductory phone consultation today!
About Mason & Associates, Inc.
Mason & Associates, Inc., was founded in 1989, specializing in Life Planning for individuals, families, and small businesses. Life Planning places a person’s core life values at the heart of the advice process and focuses on the human aspects of financial planning.
As a client, your personal story is key to our planning process. That is why we strive to build a close relationship that will encompass every aspect of your life. Together with our team of professionals, we guide you through the process of identifying what is important to you, your goals, your dreams. We then put into place a financial road map to set you on your way toward achieving your objectives.
Our responsibility does not end there. As you encounter bumps in the road, changes in goals, or any other roadblocks, we are there to offer advice and guidance. We are there to celebrate your successes and cope with your challenges. We work alongside your other professionals, such as your attorney and your CPA, to be sure all of your legal and financial needs are aligned.